What do people actually know about personal finance?
Not much, it seems...

Monday, October 4, 2010

Advice to Parents

Having offered advice to students in a recent blog post, I want to turn now to parents to talk about how they can be advocates for their children’s financial education. As I have mentioned in previous posts, financial literacy is a necessary skill in the modern world, akin to the skills of reading and writing. Just as, with modernization, written literacy became a critical skill, the realities of today’s economies have made financial literacy a critical skill.

What changes have made this a reality? Today’s young people are very aware of and widely exposed to money, and there are many transactions that require an understanding of basic financial concepts, from deciding what to do with allowance or gift money to managing a mobile phone account to allocating earnings from an after-school or a summer job. As they finish high school, young people confront one of their most important financial decisions: whether and how much to invest in education. The wage difference between college- and non-college-educated workers has been increasing, with individuals without a college degree seeing their wages stagnate or even decrease. Lack of a college degree may mean a lifetime of low wages. On the other hand, the cost of education has been increasing rapidly, requiring astute decisions about which college to attend, in which state, and at what cost.

And when they enter the world of work and young adulthood, today’s young people will have to make many other important financial decisions. With the shift in retirement-planning responsibility from employers and government to individual workers, young people will be in charge of deciding not only how much to save but also how to allocate their retirement wealth, and they will have to do so confronting financial markets that are increasingly complex in terms of products offered and management and understanding of those products. Not only asset building but also debt and debt management will be increasingly important. Opportunities to borrow have expanded and, in addition to financing education, young people will have to learn how to manage credit cards and other, often more expensive, methods of borrowing. In such an environment, mistakes are easy to make and, as the financial crisis has indicated, can be very expensive, and costly mistakes may ultimately mean that you—the parent—are supporting your child far beyond the time you had expected to (I know, a scary thought).

There are several reasons why financial education should be offered in school. First, the level of financial literacy is very low; in my view, too low for young adults to be able to make savvy decisions. Moreover, current studies show that financial literacy is unequally distributed in the young population. According to studies from the Jump$tart Coalition for Personal Financial Literacy, only about 9 percent of high school students can be deemed financially literate. And this small proportion of students is disproportionately comprised of white males who have financially sophisticated parents. Thus, students are going to start out on very unequal footing, and differences can only grow larger over time. And even for those belonging to the more financially literate group, it is not clear that reliance on parental know-how and guidance is an effective way of learning; parents’ experience may not apply in a rapidly changing economic environment, in particular one in which young people will be competing in global financial markets filled with people from other nations, who have been exposed to formal financial education in school.

So, what can be done to promote financial education in school? One good start is to request that your child’s high school participate in the Financial Capability Challenge. The Challenge is a voluntary online exam and classroom toolkit that helps educators teach high school students about saving, budgeting, investing, use of credit, and other important skills critical to developing strong financial knowledge and capability. The next online exam will take place between March 7 and April 8, 2011. Educators and students who score in the top 20 percent nationally and who are among the top scorers in their school will receive official award certificates.

The Financial Capability Challenge is an excellent initiative, and it provides a good incentive to both students and teachers for gaining financial education. More than 76,000 students and 2,500 educators in all 50 states participated in the 2009–2010 school year Challenge. I participated in one of the award ceremonies last spring and saw what a rewarding experience it was for the students, teachers, and parents, and I was proud to be able to be part of it.

Become an ambassador for financial literacy by asking your school to participate in this program. Make sure your children will be prepared for the new world they will be facing: for the decisions they’ll need to make about their own education and for the financial markets they’ll have to participate in if they are to provide themselves with a financially sound adulthood.

Educators can begin registering for the Challenge today at http://www.challenge.treas.gov/.

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About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.